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Mechanisms of Board Turnover: Evidence from Backdating

We analyze board-turnover of firms implicated in stock-option backdating to assess the effectiveness of board elections within the corporate governance process. Despite high reelection rates among nominated directors, board-turnover was substantial. Critically, these turnover decisions were affected by the anticipated outcome of a potential shareholder vote. Thus, reelection rates are of limited value in assessing the effectiveness of shareholder voting. Independent and inside directors departed though different mechanisms: independent directors primarily were not renominated, while inside directors generally resigned. Finally, directors who were involved in backdating experienced reductions in both the number and prestige of their directorships.